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Banks Lobbying Against Derivatives Trading Ban

Cory Strupp, who represents Wall Street in Washington, spent the last six months lobbying for more than two dozen changes in the derivatives chapter of the Senate's financial legislation.

He has spent the last two weeks focused on one: eliminating a new provision that would require banks to leave the lucrative business of derivatives trading.

Democrats surprised the industry by adding the “push-out” provision in mid-April, transforming the final rounds of an epic prize fight. The industry has been forced to set aside the issues that were its greatest concerns, including its opposition to a requirement that almost all derivatives trades be recorded on public exchanges.

Mr. Strupp, who works for the Securities Industry and Financial Markets Association, a Wall Street trade group in Washington, said that he generally has only 30 minutes to sway a senator or aides. He said he now uses almost the entire time to argue that banks should retain the right to trade derivatives.

The nation’s five largest banks, which dominate the derivatives business, have dispatched trade groups, paid lobbyists and their own executives to convince senators that excluding banks from the derivatives business would make markets less safe by shifting the trading to foreign banks and other institutions that are subject to less federal oversight.

The provision that would prohibit banks from trading derivatives has alarmed the industry because it strikes at the combination of commercial banking and Wall Street trading that defines the modern industry.

By one count the five banks together have mustered more than 130 registered lobbyists, including 40 former Senate staff members and one retired senator, Trent Lott. The list includes former staff members for the Senate majority and minority leaders, the chairmen and ranking members of the banking and finance committees, and more than 15 other senators. In the first quarter, the banks spent $6.1 million on lobbying.

Bankers and Congressional aides say the provision is likely to be weakened or removed, in part because the Obama administration and leading Democrats are concerned that it would diminish oversight of the derivatives marketplace. But the bankers and aides also agree that the focus on derivatives has increased the chances that other controversial proposals will pass, including a ban on “proprietary trading,” or trading in their own accounts.

“A lot of oxygen has been burned here in talking about where we are on derivatives,” said Rob Nichols, president of the Financial Services Forum, a trade and lobbying group for 19 of the nation’s largest financial institutions.

Derivatives are contracts whose value is determined by something else. Trading in derivatives is dominated by the nation’s five largest banks, JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup and Wells Fargo. Most deals are done in private, making it difficult to compare prices or identify problems.

The financial legislation proposed by the Obama administration and passed by the House would require most derivatives to trade on public exchanges, in the belief that a transparent marketplace will be safer and cheaper. The scope of the exchange trading requirement has been the focus of the debate for months. Opponents argue that the bill would limit the industry’s ability to customize derivatives to match the needs of clients.

Then the chairwoman of the Agriculture Committee, Senator Blanche Lincoln, Democrat of Arkansas, dropped a bombshell in April, introducing language that would require banks to choose between trading in derivatives and remaining under federal protection.

The government’s umbrella, including deposit insurance, allows banks to raise money at lower cost than other financial institutions. Mrs. Lincoln said the bill would help to ensure that banks use that cheap money for traditional activities like lending.

The financial industry says that derivatives are a valuable product used by more than 95 percent of Fortune 1000 companies to hedge against risks, including price changes.

“These swaps have become standard bank products. The proper response would be to recognize that the markets have evolved and there’s been innovation and they need to be regulated by bank regulators rather than pretending that they’re not integral to the system,” said Daniel F. C. Crowley, a partner at the K&L Gates law firm and an industry lobbyist.

The change could cost the industry a lot of money. Banks reported $22.6 billion in derivatives revenue in 2009, according to the Office of the Comptroller of the Currency.

Banking executives were caught flat-footed by Mrs. Lincoln’s provision, and many are still seething. One senior executive at a major financial institution, speaking on condition of anonymity so he could talk frankly, said the idea was “irresponsible” and the details revealed a basic ignorance about the financial industry.

The executive, who said he had spoken with several senators in recent days, said the industry now was simply trying to get a hearing. “We’re on the outside, knocking on the window and saying, ‘Hey, listen to us just a little bit,’ ” the executive said.

Mr. Strupp says he tries to explain to senators and aides that they should not be too hasty in blaming derivatives for the financial crisis. He often refers to how one of the first interest-rate swaps from the early 1980s has become a common kind of derivative that protects companies against changes in interest rates. He says he still tells that story on Capitol Hill as part of a broader effort to explain how a complicated and often-misunderstood category of financial products grew up and became important to the broader economy.

“I talk to people about why they should be careful about impairing the use of derivatives,” Mr. Strupp said.

The Senate has proved to be a difficult audience. When Senator Christopher J. Dodd, Democrat of Connecticut, released a draft of the financial legislation in November, Mr. Strupp and his clients drew up a list of roughly 30 problems that the industry had with the proposals. About two dozen of those provisions remain in the bill.

But the industry has gained important allies in its opposition to the Lincoln provisions. Timothy F. Geithner, the Treasury secretary, has expressed concern about the impact on regulation of derivatives trading. And on Thursday, Paul A. Volcker, the former Federal Reserve chairman, said in a letter to crucial senators that the proposed ban on proprietary trading, which the administration has called the “Volcker rule,” was sufficient to address the most worrisome kinds of derivatives trading.

“The provision of derivatives by commercial banks to their customers in the usual course of a banking relationship should not be prohibited,” Mr. Volcker wrote.

Opponents of the Lincoln provisions still must persuade senators to vote for a change that could be portrayed as softening the financial legislation. Only Republicans have expressed public opposition. Senator Judd Gregg of New Hampshire, with Senator Bob Corker of Tennessee and Senator Saxby Chambliss of Georgia, introduced an amendment on Friday to remove the Lincoln language from the bill.

The challenge, said one lobbyist, is that senators may not support Mrs. Lincoln’s language, but they have political problems with opposing it because of the public’s anger at Wall Street.